The Prudential Regulation Authority and the Financial Conduct Authority have finished gathering responses to their plans to reform the UK’s securitization regulation. The consultation began in February on a range of measures that would make it easier to issue and invest in securitizations and closed on Monday.
The feedback that has been published is encouraging for the regulators. That is unsurprising, given they are cutting back swathes of prescriptive rules, in favour of a principles-based approach.
But as welcome as it is for the UK regulators to change the rules in the UK, the impact of such changes will be limited. GlobalCapital pointed out in February that the EU’s rules are a constraint on most deals that will want to comply with rules in both jurisdictions.
And there is only so much impact from changing the securitization rules anyway. The big prize is the prudential treatment of securitization and its eligibility for the Liquidity Coverage Ratio.
Better, UK prudential regulation can be set to maximise securitization’s benefits for UK institutions, regardless of what the EU does.
If you make it compelling for banks, pension providers and insurance companies to invest or issue, they will find a way to work with the rulebook. If the regulatory capital attached to a securitization position is so punitive that the deal is uneconomic, then no matter how smooth the process may be, the deal won’t happen.
For banks, the PRA made some accommodations in October last year, expected to take effect from January 1, 2027. But it refused to lower the risk-weight floor of 15%, the minimum weighting for a single position. The regulator said it “maintains that an increase in risk-sensitivity would best be considered at an international level”.
Its resolve will be tested, because the EU looks set to cut the risk weight floor close to 5% for certain deals.
The UK work on securitization regulation is a promising start, but changing the regulatory capital treatment would be far more significant.